What does this mean?
Disincorporation is the process of moving a trade from a limited company to its shareholders who would then use the business assets to trade as a sole trader or partnership.
Presently there are a number of significant tax disadvantages when a trade is disincorporated. It is with this in mind that the Office of Tax Simplification is currently considering the introduction of a small company disincorporation relief to enable smaller businesses to disincorporate without incurring significant, additional tax charges.
What are the present disadvantages?
- The transfer of chargeable assets, property etc, may be subject to corporation tax at the company’s marginal rate.
- The transfer of goodwill at disincorporation may create additional tax liabilities for the company.
- The transfer of stock and work in progress will be deemed to have occurred at market value as the shareholders are connected to the company.
- The trade is deemed to have ceased on the transfer to the new unincorporated business, so any accumulated trading losses that are not utilised in the final chargeable period are lost.
- On the cessation of the trade, all plant and machinery is deemed to be disposed of at market value, resulting in balancing allowances and charges. It is possible to jointly elect to transfer plant and machinery at tax written down value (known as a succession election), although if the company has trading losses to absorb balancing charges, it may be more beneficial not to make the election.
- The transfer of a business as a going concern is outside the scope of VAT provided the new unincorporated business registers for VAT but a charge to Stamp Duty Land Tax could arise on the transfer of property at up to 5% of the proceeds.
Many or all of these disadvantages may be removed if a favourable disincorporation relief is introduced. In the meantime businesses considering a change from limited liability status to self employed status may be advised to wait until the outcome of the present deliberations are published. Changes to the present legal position are unlikely to be concluded before the 5 April 2013.
Please give us a call if this is of interest to you.
Sue Stephens, Tax Manager